Korea Electric Power Corporation (Kepco) and the Republic of the Philippines met with very contrasting receptions on the launch of new benchmark transactions yesterday (Thursday). Where the former had a relatively smooth passage to market, the latter fell prey to overly ambitious expectations that Japanese investors refused to deliver.
The Philippines' inability to launch a market-friendly offering repeats a pattern that has become ever more evident with each passing deal and serves only to further infuriate an already exasperated investor base. Having launched a highly controversial offering in dollars in February and a failed deal in euros two months later, the Republic had been hoping to reclaim some lost ground by attempting Yen.
Given the recent spate of successful Samurais by other emerging market credits, hopes were high that it would not only be able to salvage its reputation, but also diversify into a new investor base and secure cost efficient funding.
To a limited degree it was successful on two of the three counts. The restructured Y35 billion ($323 million) five year transaction that emerged certainly came inside the Republic's outstanding dollar spreads and also managed to widen its investor base by embracing the regional credit federations which have recently been increasingly active buyers of emerging market debt.
In doing so, however, it simultaneously managed to alienate a large proportion of Japan's institutional investor base. And for most observers, downsizing the prospective issue size, ditching one tranche and widening pricing by only a marginal degree could hardly be considered the hallmarks of success.
Yet as Steve Roberts, head of Asian fixed income at joint lead manager Nikko Salomon Smith Barney comments, "Philippines officials are extremely satisfied with the deal. They are particularly happy to have been able to price inside of current dollar levels and pleased to have established a foothold in the Yen markets."
Due August 2005, the issue was priced at par on a coupon of 3.2% against an indicative range of 2.9% to 3.3%. This equated to a launch yield 209bp over Yen-Libor, with fees totalling 70bp. Daiwa was joint-lead.
On a Dollar-Libor basis, Tokyo-based bankers say that the issue came out at roughly 240bp over, compared to current trading levels around the 270bp level based on the Philippines' interpolated curve.
Too large and too long
Not surprisingly the decision to price well inside dollar levels, where other Samurai borrowers have been content to either price flat, or at a small premium or discount, has excited a lot of opinion. Most bankers also agree that plans to raise up to Y70 billion ($700 million) were far too ambitious in the first place, particularly when allied to hopes of launching a five and seven year tranche.
So far this year, only one emerging market borrower, Croatia, has been able to extend out as far as seven years in Yen, while others that have mandated long-dated deals, such as Tunisia, remain on hold.
"Selective issuers can do longer dated deals but it is generally very difficult," one banker argues. "We have seen little demand for emerging market credits beyond five years and even at this maturity, you lose a lot of the retail accounts that tend to like higher yielding paper."
Bankers further say that once retail is removed from the picture, institutional accounts will almost solely reference pricing against outstanding dollar spreads. The one exception has been regional credit federations which tend to buy paper on an absolute coupon basis.
As one banker explains, "As a group these investors might discount the fact that the Philippines has non-investment grade ratings from the two US agencies and home in on the fact that it is investment grade rated by the two Japanese agencies. On this basis, it compares well with triple-B rated Japanese corporates trading around 100bp to 150bp level over Yen-Libor."
Lead bankers add that virtually the entire transaction has been placed domestically, with little interest from international accounts, since it is not attractive on an asset-swap basis.
At the heart of the problem, however, lies investors' increasingly gloomy credit perception.To this extent, some bankers argue that it would have made no difference had the Philippines widened pricing a little bit more.
"The fact is that investors are fed up of constantly being bombarded with new issues from the Republic," states one observer. "The background to the offering was hardly great either, with US dollar spreads continually vulnerable and negative news coming out of the country virtually every day. Investors are just not interested in buying its paper at the moment."
A building block approach
Yet at the end of the day, the Republic has at least got a deal completed and inched further towards meeting funding targets to bridge its budget deficit. So too, it has sensibly adopted a building block approach to accessing the market.
Prior to the sovereign deal for example, the Philippines National Oil Corporation - Energy Development Corporation (PNOC-EDC) came to the market in the middle of last month with a Y22 billion shibosai guaranteed by the Japan Bank for International Co-operation (JBIC) under the new Miyazawa plan. What was effectively an 87% guaranteed deal, comprised a 10 year offering, of which JBIC guarantees the last five years of coupon payments and principal risk.
Led by Bank of Tokyo Mitsubishi and Nomura, the guarantee enabled pricing to be bought right down to 40bp over Yen-Libor, equating to a yield of 2.37%. Having re-engaged investor interest in some form of Philippines risk, the sovereign has now gone one step further and is likely to be followed by other stand-alone deals from state-owned credits such as the National Power Corporation.
Kepco launches second successful deal
By contrast, Kepco's Y30 billion ($277 million) Euro-Yen offering via Merrill Lynch and UBS Warburg proved relatively straightforward and built on the success of a previous Samurai bond launched last December via Nomura.
Since the Korea Development Bank (KDB) re-opened the sector for Korean borrowers last November, a string of issuers have met an increasingly positive reception from investors that have also noticeably started to put more lines in place.
Similar to its December offering, the utility's new deal also has a five year maturity and was priced at par with a coupon of 2.6% to yield 83bp over Yen-Libor. According to lead bankers, this put the launch price right on top of the Baa3/BBB-rated group's dollar spreads and also its existing Samurai, trading at a bid/offer spread of 90bp/80bp at the time.
However, while the previous issue was heavily targeted to retail, the two leads only syndicated their own take to about 20 accounts this time round. Distribution figures further show that about 70% of bonds went to Japan, compared to 20% Europe and the remaining 10% Asia.
But the most unusual aspect of the deal was its structure, which comprised dual Euro-Yen and Shibosai formats. Bankers say that this was because the group wanted to place some paper in Japan, but was more concerned to launch a maiden Euro-deal under amended documentation.
Under the group's original Euro-MTN documentation, a sale of assets clause would have been invoked as a result of the group's restructuring and proposed privatisation. Last autumn, it amended documentation for all future issues and also hoped to get investors to waive the clause for its existing debt. In the end, however, it was forced to conduct a roughly $800 million tender offering after failing to secure the necessary level of consent.
After Kepco, Pohang Iron & Steel (Posco) is expected to launch its second deal of the year. The group is scheduled to take final bids from a select group of banks today (Friday) for a Y35 billion three year Samurai. Competition to secure the mandate and the fact that the Baa2/BBB-rated group has a slightly cleaner credit profile, is expected to drive pricing down through Kepco's levels.
Shortlisted banks comprise Daiwa, Merrill Lynch, Morgan Stanley, Nikko Salomon Smith Barney and Nomura.
